Fitch Ratings on January 21 affirmed the Long-term foreign currency Issuer Default Ratings (IDR) of Bank Pivdennyi (PB) and Joint Stock Commercial Industrial & Investment Bank's (PJSC Prominvestbank, PIB) at 'CCC,' the rating agency said in a statement.

Simultaneously, Fitch withdrew PIB's ratings as the bank had chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings or analytical coverage for PIB.

Fitch says Pivdennyi's IDRs are driven by its standalone creditworthiness, as expressed by its 'ccc' Viability Rating (VR). The VR reflects weak asset quality, very limited additional loss absorption capacity and modest core profitability (net of one-offs), while Ukraine's operating environment remains difficult with resultant further pressures on asset quality, performance and capital. At the same time, the VR considers reduced liquidity pressures and the bank's access to additional liquidity sources through its Latvian subsidiary.

At end-3Q15, PB reported NPLs (loans more than 90 days overdue) at 11% of loans but restructured/rolled over exposures were a significant 39% of loans. Existing NPLs were reasonably provisioned and/or collateralized, although significant downside risks stem from restructured/rolled over loan categories, although the borrowers were reportedly performing under the revised schedules at end-3Q15. Fitch estimates that unreserved restructured/rolled over exposures equaled to a large 230% of Fitch Core Capital, while the bank's reliance on loan collaterals remains high. Lending in foreign currencies remains significant (58% of loans), while most of the borrowers are effectively unhedged.

Pre-impairment profitability (annualized, net of one-offs), at 1.7% of average gross loans in 1H15, provided only modest capacity to absorb new losses, while the origination of new NPLs (defined as increase in NPLs in the reporting period plus write-offs, divided by average gross loans) was around 5% in 9M15 (annualized). PB's equity cushion offered only low loss absorption (estimated at around 1% of loans at end-3Q15).

The recent asset quality review and capital stress test by the National Bank of Ukraine (NBU) has revealed additional recapitalization needs of around UAH 600 million or 37% of end-3Q15 regulatory capital, although these could be executed up until end-2018. The bank is looking to achieve it through the prolongation of existing subordinated debt ($14 million due in October 2016) or new subordinated debt or other capital management measures. The regulatory forbearance allows sector banks to restore solvency only gradually with the new minimum requirement of 5% from September, 2016 (PB's regulatory capital adequacy ratio was 10.6% at end-3Q15).

Retail deposit outflow has been significant at PB, despite regulatory cash withdrawal restrictions in place from early 2014, although it moderated to 14% in 9M15 from 36% in 2014 (adjusted for FX effects). Liquidity pressures were off-set through increased shareholder deposits, term UAH-funding from the NBU, short-term FX placements by Latvian subsidiary and deposits from its few corporate clients (the latter at below market rates). Access to FX remains stretched in the country, so the stability of the highly dollarized deposit funding (57% of the total) is key to maintaining FX liquidity. PB's standalone FX liquidity cushion is moderate, although Fitch understands additional FX liquidity may flow directly or indirectly through the Latvian subsidiary, including from its clients placing their funds with PB.

The Support Rating Floor of 'No Floor' and Support Rating of '5' reflect Fitch's view that support cannot be relied upon due to the bank's limited systemic importance and the Ukrainian authorities' limited financial flexibility to provide extraordinary support to banks. Potential and support from the shareholders, while possible, is also not factored into the ratings, as it cannot be reliably assessed.

Fitch also says Prominvestbank's IDRs and National Rating factor in the likelihood of support the bank may receive from its foreign shareholder. PIB is almost fully owned by Russian state-owned Vnesheconombank (BBB-/Negative). The affirmation of the bank's 'CCC' Long-term foreign-currency IDR reflects the constraint of Ukraine's Country Ceiling (CCC), which captures the risk of transfer and convertibility restrictions and limits the extent to which support from the foreign shareholder of the bank can be factored into the ratings. PIB's Long-term local currency IDR also takes into account the country risks.

Fitch withdrew PIB's VR without affirmation due to insufficient information to assess the bank's current intrinsic creditworthiness.

Fitch says that Pivdennyi's ratings could be downgraded if further deterioration in asset quality results in capital erosion, without sufficient support being provided by the shareholders, or due to liquidity shortfall, in particular, in foreign currency, following deposit outflows.

Stabilization of the country's economic prospects, combined with strengthening of PB's loss absorption capacity, would reduce downward pressure on the ratings.

The rating actions are as follows:

Pivdennyi Bank:

- Long-term foreign currency IDR: affirmed at 'CCC;'

- Short-term foreign currency IDR: affirmed at 'C;'

- Support Rating: affirmed at '5;'

- Support Rating Floor: affirmed at 'No Floor;'

- Viability Rating: affirmed at 'ccc.'

PJSC Prominvestbank:

- Long-term foreign currency IDR: affirmed at 'CCC', withdrawn;

- Long-term local currency IDR: affirmed at 'B-', Outlook Negative, withdrawn;

- Short-term foreign currency IDR: affirmed at 'C', withdrawn;

- Support Rating: affirmed at '5', withdrawn;

- Viability Rating: 'ccc', withdrawn;

- National Long-term Rating: affirmed at 'AAA (ukr)'; Outlook Stable, withdrawn.